What is an employee benefit trust?
Essentially, an employee benefit trust is a type of trust set up by a company to hold assets, which are typically cash or shares, to be used for the benefit of its employees. The trust serves as a legal instrument to provide certain benefits or incentives to the employees, ranging from share schemes and bonuses to other forms of compensation.
For example, the funds may be invested in shares, such as by purchasing shares in the employer company or associated entities. Some arrangements may allow salary to be contributed to a trust; potential outcomes depend on individual circumstances and tax treatment. Review current ATO guidance and seek advice before proceeding. The idea is to align the interests of the workers with those of the company in order to create a more cohesive and, ultimately, motivated workforce.
Notably, employee benefit trusts differ from other trust structures, and small-to-medium business owners and leaders may be less familiar with them. An EBT’s primary objective is to deliver benefits to the employees. While the details may vary, the main goal remains the same, namely to provide rewards and benefits to workers in a tax-efficient and controlled manner for the organisation.
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How does an employee benefit trust work?
An EBT is typically funded by the employer. This means the company transfers assets, for example shares or cash, into the trust. The trustees are responsible for administering the trust in line with the trust deed, including how and when benefits are distributed. For an overview of trust structures, see business.gov.au.
One key aspect of EBTs is the employee benefit trust accounting. Proper accounting can help support transparency and compliance with regulatory norms. Accounting for an EBT typically involves recording the value of the benefits provided, the assets within the trust, and any liabilities. Depending on the trust structure and applicable rules, organisations might need to prepare annual financial statements or independent audits. Review requirements for your specific arrangement with a qualified adviser and and current ATO guidance.
Organisations need to be meticulous in their employee benefit trust accounting to ensure that all stakeholders – including the ATO – have a clear understanding of the trust’s operations at any time. After all, proper accounting not only ensures transparency and compliance with regulations but also makes it possible to track the trust’s performance.
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What are the benefits of having an EBT?
For some companies, the appeal of an employee benefit trust lies in the tangible benefits it offers the company as well as employees. Here are some key advantages:
Employee motivation and retention
An employee benefit trust may be used with the intent to support motivation and retention, depending on the design and context. By linking rewards to company performance, employees are incentivised to work towards the overall success of the business. In a nutshell, an EBT can give employees a sense of ownership in the company. When employees know that they are beneficiaries of the trust, they are more likely to be motivated and productive in their work.
Tax benefits
A correctly structured employee benefit trust may provide tax benefits for both the company and its employees, depending on the arrangement and current ATO guidance. Tax outcomes (including how contributions or trust assets are treated) can vary by arrangement and over time. Organisations are encouraged to review current ATO publications and seek professional advice for their specific circumstances to support compliance and reduce the risk of unintended penalties.
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Bankruptcy protection
In Australia, whether an employee benefit trust (EBT) offers any bankruptcy protection depends on the trust’s structure and deed, the trustee, the character of each beneficiary’s interest, and the governing law. Organisations should consider seeking qualified Australian legal and tax advice when evaluating EBTs for asset protection and, in appropriate cases, may request an ATO private ruling to confirm tax treatment for their arrangement.
A trust is a structure in which a trustee holds assets for beneficiaries and is legally responsible for the trust’s operations, so creditor access is assessed through that legal framework rather than by assumption.
Because outcomes are fact‑specific and may involve review of contributions and entitlements in an insolvency, organisations may consider obtaining qualified Australian legal and tax advice before relying on an EBT for asset protection; in appropriate cases, they could request an ATO private ruling to confirm tax treatment for their arrangement.
Flexibility
Employee benefit trusts are very versatile. From bonus schemes to share option plans or superannuation benefits, you can tailor your EBT to suit your company’s unique needs. What’s more, EBTs offer a great deal of flexibility in terms of how and when benefits are provided to employees. For example, the trustee can decide whether benefits are to be paid out in lump sums or in instalments.
Moreover, using an independent, regulated and audited trustee can serve to reassure employees that all decisions are impartial and in the best interests of the beneficiaries.
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What needs to be considered before setting up an EBT?
While the benefits of employee benefit trusts are clear, companies need to take into account the following aspects before implementing an EBT:
Regulatory compliance
The ATO has published guidance and alerts concerning arrangements that seek tax advantages. If you are considering an EBT‑like structure, review current ATO materials and consult a registered tax adviser. If you need clarity on how tax rules may apply to your circumstances, review the ATO’s published guidance about private rulings and consult a qualified tax professional.
Engaging a tax professional when establishing an EBT is generally recommended to help organisations understand their tax obligations and reduce the risk of unintended penalties. An EBT may attract scrutiny for the ATO; consult current ATO guidance and seek advice.
Set up and management costs
It’s clear that establishing and running an EBT requires resources. Organisations, therefore, need to factor these in when considering the overall pros and cons of setting up an employee benefit trust. As well as the tax professionals and auditors required to monitor the establishment and operations of the EBT, an employee or other representative may need to be appointed to oversee it and make decisions, for which they are usually financially compensated.
Employee perception
It always matters what your employees think, especially when you introduce new processes. When it comes to EBTs, it’s important that your staff see them as a genuine benefit. To ensure this, communicate any trust-related information clearly and transparently.
As it is a relatively new concept in Australia, be sure to explain all the benefits and pitfalls of introducing an EBT.
In particular, be upfront about the tax that employees may be obligated to pay because of this scheme, as the amount that is contributed to the trust on behalf of the employee may still be assessable as part of their individual income tax.
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What’s next for EBTs in Australia?
In the ever-evolving and often unpredictable business landscape, Australian organisations need to stay competitive in attracting and retaining staff and that includes using tools that can help them achieve this. Looking to what tools are used by businesses located overseas can be a good way to get new ideas, and employee benefit trusts offer a tried-and-tested solution for companies looking to motivate and retain their staff. Ensure your approach aligns with current Australian tax guidance and your organisation’s policies; obtain professional advice where needed.
